Puerto Rico's current debt crisis has earned it many comparisons to Greece the most notorious being the German finance minister's recent tactless attempt at humor when he facetiously proposed "exchanging Greece for Puerto Rico" as a Eurozone member. The remark, like so many of its kind made by frustrated public officials, seem to blame the victim for a problem that is deeply tied to the historic problem of neo-colonial exploitation. One observation from the online journal, The Hill gave a prime example of how the neo-colonial status of Puerto Rico, and its economic subjugation by the US, contributed vastly to the intractable nature of Puerto Rico's debt crisis. Noting that the Island's debt is nearly $73 billion, most of which is owed to US bondholders, the author notes that;
"...as the borrowing crested during 2011-13, instead of accruing significant visible public improvements and infrastructure, the U.S. territory jettisoned two major toll roads and San Juanâs international airport to private parties in order to monetize their cash flows for about $1.8 billion. This was on top of more than $5 billion borrowed during this period...Foremost among the players in this decades-old drama were local politicians struggling to stay in office. They, in turn, received support from battalions of self-interested financial and professional service firms who stood to benefit from fees generated in bond deals."
This is a great example of how debt is applied everywhere to achieve privatization "through the back door" so to speak; lend a country, municipality, state owned enterprise money, generally through the bond market, and when recessions shrink tax base below levels allowing timely debt service, force privatization of public services at fire sales prices to global corporations so as to "monetize cash flows" for debt repayment. It should not surprise us that corrupt local politicians work such deals with "self interested" financial advisors who stand to personally benefit.
But Puerto Rico's current debt crisis is not just the result of corruption and financial cronyism. It is the consequence of decades of foreign domination and neo-colonial subjugation.
A report by former ranking IMF official Anne O. Krueger and two coauthors basically concluded that Puerto Rico's debt is currently an intractable problem and that the central government is too fiscally strapped to make regular debt service payments. Krueger noted that Puerto Rico's bond rating was downgraded to below investment grade in 2014 as the Island's debt steadily rose and the economy's GDP markedly shrank. The report gave a cogent summary of the problem; "The economy is in a vicious circle where unsustainable public finances are feeding into uncertainty and low growth, which in turn is raising the fiscal deficit and the debt ratio." In explaining the core factors driving the crisis, Krueger's report pointed to the ill effects of US/Puerto Rican economic relations such as the collapse of housing prices on the Island resulting in a decline in the construction industry (construction accounted for three quarters of total investment decline which itself comprised ten percentage points of GDP) lowering the ability of consumers and businesses to borrow which in turn lowered spending levels and economic growth. The reduction in trade with the US, Puerto Rico's main trade partner, since the 2008 financial crisis "hollowed out the Island's industrial sector" according to Krueger resulting in job loss and slow growth from Puerto Rico has yet to recover. This too has contributed vastly to the current problem. All this has caused a crisis in the Island's financial system as commercial banks have lost over 30% of their assets since 2005; the entire banking sector would have collapsed completely were it not for US federal government intervention with TARP assistance. This also reflects excessive economic dependence on the US as a trade partner and investor as well as long standing US domination of the Island's economy and financial system.
The report notes that Puerto Rico's total government revenue intake has stagnated at around $16.4 billion over the past few years while spending commitments have risen albeit very modestly. True to her fiscal conservative ideology, Krueger recommends cuts in real wages, central government spending and reducing taxes, especially on foreign businesses all of which will only depress aggregate demand and slow the economy further making recovery and debt service even more difficult. The real problem according to some, such as author and Puerto Rican based attorney, Linda Backiel, is that US/Puerto Rican economic relations are lopsided in favor of private US business interests which drain the Island of vital development resources that sustain growth and employment. When the proverbial well runs dry, public officials like Anne Krueger of the IMF typically make tough austerity recommendations designed to perpetuate the underlying problems by shifting income from the poor to the corporate rich. Backiel points out;
Puerto Rico is essentially running on bonds held by U.S.-based banks and corporations, although pension funds and mutual fund investors attracted by triple-exempt, high-yield bonds are also affected. Oppenheimer Funds and Franklin Templeton Advisers lead the way. And then there are the hedge and vulture funds (Blue Mountain Capital, Stone Lion Capital, Aurelius Capital, as well as several holding junk bonds from Puerto Rico, Greece, and Argentina). Together, they hold close to half of the debt...The vultures are circling. They insist that whatever liquidity remains in the country is theirs, and they intend to get it. Some have been bleeding the anemic economy for years. Between 2006 and 2013, Puerto Rico paid $1.4 billion for financial âservicesâ such as swap termination fees.
Despite the fact that Puerto Rico has been financially troubled for most of the last decade and a half, wealthy North American investors have been cashing in on profitable financial opportunities as roughly a million and a half mostly poor Puerto Rican residents (over a third of the Islands population) have emigrated over the last fifteen years, according to a recent report in The Guardian. This is mostly the result of tax incentives offered by Puerto Rico's central government to foreign business interests to create jobs and tax base in order to boost the economy and promote easier debt servicing. But the efforts have largely failed. According to most accounts, measures such as the Individual Investors Act of 2012 (Act 22) has attracted many investors who commit resources to financial speculation that results in little job creation.
One example is hedge fund manager John Paulson of Paulson & Co. to invest billions in real estate ventures on the island. According to one source, Paulson is "...developing a $500 million hotel and condominium resort on Dorado Beach..." He also "...will have invested $1.5 billion in ultra-luxury real estates in Puerto Rico by the end of this year. These properties include the St. Regis Bahia Beach Resort and the Condado Vanderbilt Hotel." Paulson is only one of many investors taking advantage of laws like Act 22 to buy up distressed properties at fire sale prices to profit at the expense of Puerto Rico's long term economic health. Investors like him get generous tax incentives while distressed home owners and small business get nothing. Act 22 offers the following incentives to foreign investors;
"...a 0-percent tax on earnings and profits, a 3- to 4-percent flat income tax, and a 0-percent property tax. There is also a 0-percent tax on dividends and interest, and a 0- to 10-percent tax on long-term capital gains, which can be as high as 20 percent in the U.S."
These lavish incentives come at a time when the government is simultaneously implementing austerity for the majority of people. Two noted Puerto Rican scholars writing in the online journal Jacobin Magazine, list the effects of the crisis and the current "solutions" to it which they duly note are emblematic of the Island's historic "scars of colonialism";
“Per capita income in Puerto Rico is almost half that of Mississippi, the US’s poorest state. The jobless rate is 12.6%; in West Virginia, the state with the highest unemployment rate in the US, that number is 7.4%. Puerto Rico’s labor participation rate is around 43%, 20 points lower than in the US as a whole. Median household income is almost $7,000 less than in Detroit (and less than half of the US average). And a staggering 45% of the population lives in poverty (compared to about 15% in the US).”
The austerity measures since 2009, with the election of the free market oriented New Progressive Party to office, have involved firing about 30,000 public employees, raising excise taxes on gasoline, raising the sales tax and lowering the legal minimum wage. All these measures have suppressed consumer demand and made the problem of GDP growth worse. The chronic stagnation caused by these policies has led to massive capital flight. According to the authors of the Jacobin article, "... a substantial amount of wealth created in the island is extracted and not reinvested — $35 billion in manufacturing profits, or approximately a third of GNP, are repatriated back to the United States."
So billions in capital flight, tax cuts for the rich costing the central government billions, the privatization of some of the Island's vital public services and lowering the minimum wage have unsurprisingly not led to the kind of growth that enables debt service but only to more profits for foreign investors which have always dominated the Island's fragile economy. The expiration of Section 936 of the IRS tax code in 2006 which allowed US corporations to invest in Puerto Rico without owing an corporate taxes in the US at all, was met with the flurry of tax incentives in 2012 like Act 22 and Act 20 (the Export Services Act) which taxes hedge funds at a mere four percent of their gross profits. None of this has resolves the structural weaknesses in the Puerto Rican economy and has only deepened the long standing foreign financial control of the Island. Such control is well reflected in the absurd pro-business policies at the expense of the vast majority of the Puerto Rican people.
It is well known that the dozens of US hedge funds that own roughly a fifth of Puerto Rico's total public debt, much of which was purchased cheaply after the downgrading of the governments bond rating, are pushing the central government to borrow at high rates to repay bond holders by squeezing the Island's working class with givebacks and austerity. These include millions every year collected in increased regressive taxes on the working class such as the ones mentioned above. The search for realistic solutions must start with the obvious fact that placing the fate of the impoverished Island in the hands of US hedge funds is an utterly wretched idea. One of the problems is that the US tax code allows the Puerto Rican central government to issue tax free debt. This has invited vulture funds who later demand austerity as a means of facilitating repayment.
Recent US Congressional proposals that would allow the Island's municipalities to legally default but not the central government or states would clear up only a third of Puerto Rico's debt and do nothing about the economy's long standing structural problems such as chronic stagnation and foreign domination of the economy. The Island doesn't have a spending problem; as the IMF report itself pointed out, annual government spending as a share of GDP has declined markedly over the past five years and the budget cuts that occur every year only slow the economy and decrease the working classes standard of living. More cuts are not the answer. The US government must stop encouraging debt through US tax code incentives as a means of financing the Puerto Rican economy and fund a massive jobs program for full employment now! More tax breaks for foreign businesses has proved to be a disaster. A public investment program to expand and strengthen local businesses and boost employment will have a longer term impact than more debt refinancing plans that only demand austerity while increasing foreign control. The problem has been the neo-colonial domination of the Island's fragile economy. A shift to local based development driven by growing middle class income will enable stable debt servicing today and reduce reliance on ruinous high interest foreign loans in the future.